Crist freezes state investment fund

Friday

Nov 30, 2007 at 12:01 AMNov 30, 2007 at 6:54 AM

The freeze aims to halt an economic crisis tied to the mortgage mess.

By JOE FOLLICKSun Tallahassee Bureau

TALLAHASSEE - In an effort to halt a "once in a lifetime'' crisis with roots in the national mortgage meltdown, Gov. Charlie Crist and other top officials have frozen a state-run investment fund used by nearly 1,000 local governments in Florida.

As a result, hundreds of mostly smaller cities, counties and school districts will not be able to get money they had trusted the state to invest until at least next week. Some officials warned the move could mean missed paychecks for some public employees.

The action came at an emergency meeting Thursday. Cities and counties had pulled $10 billion out of the state's Local Government Investment Pool in just the past two weeks amid concerns that investments related to subprime mortgages could lead to losses.

It does not appear that any governments in Alachua County that have money in the fund will be affected by the freeze.

Alachua County School Board Assistant Superintendent Keith Birkett said the district had been monitoring the situation for a few weeks and decided earlier to withdraw most of its money. About $8 million remains in the fund.

"We have diverted all of our tax collections from the pool to our bank for investments. Had we not done that, we would not have met our payroll this week, so it's a good thing we did," Birkett said. "We have a small balance still in the pool and as soon as they reopen, unless something changes, we will probably withdraw it. We'll probably get a lower return than what we had been getting, but we feel it's in the best interest of the district."

Alachua County Clerk of the Court Buddy Irby said various county operations have money in the pool. But Irby added the county has enough money on hand that it will not be affected by the action.

"We are certainly monitoring it closely. We have investments there but right now, because of liquidity, we are not having any problem," Irby said. "This is tax season, so we're holding onto that money. We will make sure the needs of the county and the Library District are met."

Finance officials with the city of Gainesville could not be reached for comment. Officials from several smaller cities said they do not have investments in the pool.

The pool is operated by the State Board of Administration, the agency that also oversees more than $130 billion in the state pension fund.

The pool held nearly $25 billion just a few weeks ago, according to SBA Executive Director Coleman Stipanovich. He said that was down to less than $15 billion by Thursday after $3.5 billion was withdrawn that morning.

Stipanovich said the state-run fund was safe and still returning interest on investments. He blamed a "climate of fear'' exacerbated by overstatement of troubles related to a "once in a lifetime'' collapse on investments related to subprime mortgages.

He said some local governments that yanked their money from the state pool and invested it elsewhere "are jumping out of the frying pan into the fire. They don't care. They're sitting over there saying, 'I just want to be away from this.'Â ''

But with large counties like Orange, Miami-Dade and Broward pulling their investments, the pool's promised returns for those remaining were only growing more unstable. That led the SBA's board to bar any more withdrawals from the pool until confidence could be restored.

The SBA board is made up of Gov. Crist, Chief Financial Officer Alex Sink and Attorney General Bill McCollum.

Stipanovich, appointed by former Gov. Jeb Bush in 2002, had proposed using retirement funds as a hedge against default or losses in the local government investments, saying that would reassure local governments and return investments.

But Sink ripped the idea in a testy exchange, instead saying the pool should be frozen until at least next Tuesday while a third-party review of options could be conducted.

"I don't see a way for us to guarantee the (pool) money with state dollars,'' she said.

Stipanovich said any delay would only lead to deeper concern from local governments.

"If we don't do something quickly, we're not going to have an investment fund,'' he said. "If you just arbitrarily cut off liquidity, I have no ideas what the ramifications of that will be.''

But Sink said those local governments that didn't remove their money from the state pool should not have to face possible losses while those that already left are safe.

"Those people who got their $3.5 billion today are darned lucky. Is that fair?'' she said. "What happens to the people who have the last $2 billion in the pool? They get zero.''

Leon County Clerk of Courts Bob Inzer attended the hearing and criticized Sink's plan. He removed his county's investments with the pool earlier this month, but said he would have considered returning had Stipanovich's plan been enacted.

"We needed leadership from the state today. We didn't get it,'' said Inzer, who helped create the pool. He said payrolls might not be met, especially in smaller governments that may have invested most or all of their money with the state.

But Sink, who requested Thursday's meeting, quickly convinced Crist and McCollum, who voted for the freeze.

"I don't see any harm,'' Crist said. "We need to protect what is there.''

The pool was created 25 years ago as a way for local governments, especially smaller ones that may not have the manpower to evaluate myriad investment options, to generate short-term gains on their tax revenues while keeping quick access for payments of bills and payroll.

The state's fees are far less than those charged by private investment firms. But the pool has $1.5 billion invested in securities from four issuers that could default on payouts to the state, including Countrywide - the company at the center of risky subprime mortgages offered to homeowners during the real estate boom.

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